Metropolis Healthcare - Normalcy within grasp - ICICI Securities

Metropolis Healthcare (Metropolis) provided a business update for Q2FY21 and mentioned that it was able to achieve normalcy in its ex-COVID business in Sep'20 vis-a-vis Sep'19. Company achieved normalcy faster than anticipated as easing of lockdown restrictions aided business recovery. For the quarter, ex-COVID business has reached ~85% of last year's level (~71% in Q1FY21). Volumes would continue to improve in H2FY21 but we expect realisation to decline with falling prices for COVID-19 test as well as reducing proportion of COVID-19 test in the overall business. Aggressive network expansion with B2C focus over the past few years would help Metropolis to improve volume growth going forward. Retain ADD.

- Highest ever quarterly revenues: Metropolis has announced that its revenue for Q2FY21 has nearly double sequentially and ~25% over the same quarter last year. Specifically, Sep'20 has seen a ~40% growth over Sep'19 as the company has achieved normalcy in ex-COVID business in the month. Company achieved normalcy faster than our estimate of Q3FY21 driven by a healthy growth in the ex-COVID business which reached ~85% of last year levels. This level was ~71% in Q1FY21 and the improvement was supported by ~76% rise in number of patients at 2.41mn in Q2FY21 with easing of lockdown restrictions. We believe volumes would continue to improve in H2FY21 but realisation would decline as the prices for COVID-19 testing would continue to fall and so will the contribution of COVID-19 test to overall revenue.

- Sharp recovery and cost rationalisation to lift margin: Metropolis has witnessed a sharp recovery in the ex-COVID business during Q2FY21. Despite lower realisation as compared to COVID-19 testing ex-COVID business would generally have higher margin. Growing proportion of this segment would not only lift margin for the quarter but also in the coming quarters. Additionally, the company had undertaken cost rationalisation program which helped in reducing fixed, semi-variable and variable costs by 9%, 12% and 21% respectively in Q1FY21 and management expects ~25-50% of the reduction in fixed and semi-variable costs to be sustainable. We expect EBITDA margin to gradually improve from current levels and reach 30.0% in FY23E.

- Outlook: We expect Metropolis to register revenue, EBITDA and PAT CAGRs of 14.6%, 18.4% and 20.5%, respectively, over FY20-FY23E. Return ratios would remain strong at more than 30%. We are positive on the long-term outlook given strong brand franchise with sustainable growth, healthy FCF and potential shift of unorganised market to organised players.

- Valuation: We raise our revenue/EBITDA estimates by 5-10/4-7% to factor in sharp and speedy recovery in the ex-COVID business, continuing COVID-19 business and cost savings. We maintain ADD on the stock with a revised DCF-based target price of Rs2,058/share (earlier: Rs1,882/share) implying 38.0xFY23E EPS and 23.8xFY23E EV/EBITDA. Key downside risks: Higher-than-expected competition and pricing pressures.

Source : Equity Bulls

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